We’ve recently been helping a couple of clients buy their first home under the shared ownership schemes that are available. Whilst working with these, and previous clients, a few interesting points have arisen that I thought that it might be worth sharing.
If you’re not familiar with shared ownership, it’s an affordable housing scheme that’s offered through some housing associations and builders, as a help in getting a foot on the ladder. You purchase a share of the property, and then rent the remainder from the house builder or association that owns the remaining share. The rent will need to be paid until either you move, or until you’re in a position to purchase the outstanding share.
In principle these can be great and useful schemes, and have been used by many people to move in to their first home. When deciding if it’s an option for you, please don’t forget about the rent! This could have two impacts:
- Firstly, by reducing the loan that you can obtain
- Secondly, it could mean that shared ownership actually becomes the more expensive option.
Lenders now use affordability calculators to determine the maximum loan amount, rather than the old ‘income multiple’ model. In this example I will use multiples, simply because it’s an easier way to explain:
Imagine the following couple:
- They have a joint income of £45,000 per annum.
- They drive a car that has a monthly loan payment of £210.
- Combined credit card balances of £5,000 costing (min) £150 per month.
- From savings & family gift, they could raise £20,000 for deposit & fees.
- They find a house valued at £180,000 which they’d like to purchase, and discover that the one next door is available on a 60/40 shared ownership scheme … What should they do?
Buy the whole thing, and contribute a 10% deposit.Max borrowing (based on 4x multiple of income minus commitments)£45,000 – (210×12) – (150×12) = 40,680 x 4 = £162,720Monthly mortgage cost (2 yr fix, 30 yr term) approx. £700 per month
Purchase the 60% share, & contribute 10% of that.Rental £300 per month. Max borrowing (based on 4x multiple of income minus commitments)£45,000 – (210×12) – (150×12) – (300×12) = 37,080 x 4 = £148,320The couple only need to borrow £97,200 to fund 90% of £108,000.They are tempted by the lower deposit, which would leave funds for new furniture!
Monthly mortgage cost (2 yr fix, 30 yr term) £450
Cost of the home per month, with rent, would therefore be £750
The above example works in both cases, but the downside of ‘B’ is that it’s more expensive each month, and the couple would only receive 60% of any increase in property value.
If the couple decide to move on to the next property, and the house is sold for £200,000:
|A: Equity (to carry forward) made up of original deposit, plus mortgage reduction, plus £20k.||B: Equity is made up of original deposit, plus mortgage reduction, plus £12k.|
During time of ownership the couple has paid £50 extra every month, and lost out on £8k of equity – Deposit for the next property is smaller, & therefore costs for next house increased.
Finally, and another potential drawback to consider, is that all schemes have rules & regs that surround them, and in many cases these may be more restrictive than the criteria used by a mortgage lender.
If you are looking to purchase your first home, then I would encourage you to consider all of the options available, and to please study both the short and longer term implications of the different choices. In order to fully understand some of schemes available, I would strongly recommend seeking impartial advice from a qualified and experienced professional.